Corporate and Project Finance Modeling

Chapter 44Modeling Maintenance Reserve Accounts

In project financing and some other transactions, lenders require cash reserves to be set aside to accumulate money for the prospective payment of major maintenance expenditures. Examples of such maintenance expenditures include the overhaul of a wind turbine or the periodic resurfacing of a toll road. Holding cash reserves in a separate account generally causes the rate of return on equity for the overall project to be lower, as the earnings on the cash account will almost always be much less than either the equity return or the borrowing interest rate. The cash in a maintenance reserve or a debt service reserve account is in a sense sleeping. The developers of a project can complain that they must pay an interest rate of 7 percent to borrow money for the reserve account that is put right back into the bank and earns an interest rate of only 1 percent.

At first blush it seems that the modeling of these maintenance reserve accounts (MRAs) does not seem to pose too many programming issues. If major maintenance occurs in discrete similar time periods such as every five years, you can just add a switch for the maintenance period and then ensure that enough money is accumulated in the reserve accounts so that funds will be available to pay for the major maintenance activities. However, there are pesky programming issues with testing for the maintenance period, computing the contributions to the reserve by looking forward to the prospective ...